Judge Pares Claims From Securities Class Action

MIAMI (CN) - Investors who leveled claims of securities fraud at the Florida-based holding company of a Chinese pharmaceutical business cannot pursue claims against a CFO and auditor, a federal judge ruled.

Lead plaintiffs Christopher Brody and Tara Lewis claim Jiangbo Pharmaceuticals overstated cash balances and otherwise misled investors as it oversaw the work of Laiyang Jiangbo Pharmaceutical in China.

Jiangbo allegedly became delinquent on $35 million loans because China's strict foreign-exchange restrictions delayed cash transfers out of the country, but 2010 quarterly statements nevertheless claimed that the company had $96 million in cash and $11.5 million in restricted cash.

Investors say the numbers continued to rise until Jiangbo announced in May 2011 that it had defaulted on loan payments and was under investigation.

Days later Jiangbo stock dropped 92 percent, and Nasdaq pulled it from the exchange.

In addition to suing Jiangbo, the class also filed claims against several officers, including former Chief Financial Officer Elsa Sung, and its California-based external auditor Frazer LLP. The complaint says the defendants lied about financial stability to induce investments between June 2010 and May 2011.

U.S. District Judge Marcia Cooke dismissed the claims against both Sung and Frazer, but the class will have a chance to file an amended complaint.

Ultimately, Cooke found the investors failed to include "sufficient facts" against Sung and Frazer in their claims, which were "simply general, vague and conclusory."

"Plaintiffs' 'must have known' theory fails because they do not allege sufficient facts about the fraud to establish that Sung, even as CFO, should have detected it," Cooke wrote.

"In fact, Sung worked mainly in Florida, while the company conducted its operations in Laiyang," she added. "These facts support the competing inference that Sung did not know the company's true financial condition."

As for Frazer, "the additional facts and circumstances alleged in the CAC [consolidated amended complaint] are insufficient to show Frazer acted with knowledge or reckless disregard."

"In sum, the CAC fails to establish that Frazer's audit amounted to 'no audit at all or an egregious refusal to see the obvious or investigate the doubtful,'" the decision states.

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